‘Canadian condo craze’ gets crazier
Bertrand Marotte, Jacqueline Nelson and Richard Blackwell – Globe and Mail
The fevered pace of building in Toronto, Vancouver and Montreal is fueling fears that the condo market is dangerously close to overheating.
A surge in condominium construction helped drive overall construction starts up 14% last month to a seasonally adjusted annual rate of 244,900, the highest since September, 2007, and an increase from the March pace of 214,800, according to Canada Mortgage and Housing Corp. data released Tuesday.
Starts of multiple units, which include condominiums and apartments, climbed a sharp 27.4% to 158,500, the second-highest monthly reading on record and a reflection of what Scotia Capital economist Derek Holt termed the “ongoing Canadian condo craze.”
Comment: But everyone forgets about affordability for first time buyers, better urban planning, a backlash against sprawl and the fact that people want to live downtown.
Overall starts have now increased in seven of the past eight months, playing into concerns that the condo market is headed for a serious correction as developers continue to build. Canada now has the highest stock of unsold condos since the early 1990s, Mr. Holt said. A burst bubble would ripple through the economy.
Comment: Why do more new condos mean a correction? And with new condo prices dropping 1% per sqauare foot and resale condos now only rising at 4%, the Toronto condo market is slowing and beginning to moderate itself. There is no correction or crash coming.
The data put to rest “any doubts that Canada’s housing market, at least in certain sectors and cities, is at risk of overheating,” warned Bank of Montreal analyst Robert Kavcic.
Comment: Again, why does an increase in condo building mean overheating? How about the 70% of houses going for over asking in Toronto’s Woodbine Corridor? That might be more worth worrying about…
The fear, particularly where downtown Toronto is concerned, is that the explosion of condo starts is outstripping the demographic trend.
Comment: Says who? House prices in Canada do not exceed levels supported by underlying factors such as high immigration, growing incomes and low interest rates a CMHC report said. Based on these and other characteristics, clear evidence of a bubble is lacking, it said. So the CMHC does not think there is a bubble, nor are they worried about house prices.
“It’s starting to look like [condo construction] is running a bit ahead of household formation,” said Mr. Kavcic. “It seems the level of building is definitely in overheating territory relative to the underlying fundamentals.”
Comment: It has been ahead of household formation for a few years now. Previous to that, I am sure that it was less than household formation. So now it rises to even things out. Makes sense…
Building permits in Vancouver and Montreal have dipped, which could point to a slower pace of building, but Tuesday’s numbers still raised eyebrows.
Comment: Wait, Vancouver went down but we are still worried? That makes no sense.
Even Montreal developer Michael Dickey worries about Toronto and Vancouver, though not his city, which he sees as still playing catch-up with the others.
“I’d be worried if I was in Vancouver and Toronto,” he said.
“In Toronto, you’re getting an oversupply,” he said, adding that there is a danger the banks will start backing off on financing new deals.
Comment: They already are. Unless you have a track record, you don’t get a loan. And even if you are a known builder, unless you have 70–80% of your units sold with 20–25% down, you don’t get a loan. Which means that every crane represents a project with almost 17% of the total selling price (which is likely 20–25% of the construction costs) already paid for by buyers. In a 300-unit building with an average selling price of $360,000 that means the builder has over $18,000,000 from buyers. That is why the bank gives them the rest of the money. It takes 210–240 of 300 units to be sold before that crane goes up. Construction is a very solid vote of confidence in the project and the Toronto condo market in general.
Joe Vaccaro, president of Toronto’s Building Industry and Land Development Association, said the high construction rate simply reflects the breaking of ground on properties that were sold in 2010 and 2011.
“The statistics are a lagging indicator to those sales of previous years,” he said, adding that he’s confident Toronto can absorb new condos.
Comment: Cranes today mean sales yesterday. Sales today mean cranes tomorrow.
“Household formations are different today,” he said. “You’ve got baby boomers downsizing, born-again singles, young couples who want an affordable first home, and 100,000 new people coming into the [Greater Toronto Area] every year.”
Comment: Exactly! And those are the ones buying condos. Or renting the ones investors buy.
Nancy Taza, a sales representative at a brokerage office in one of the CityPlace condo complexes in downtown Toronto, who has a direct stake in the market, also isn’t worried.
“Are there a lot of buildings going up? Yes. But, I really don’t worry about the market and my investments [three condos], because I see the demand every day and it’s so strong – especially in CityPlace where things are still developing and the area is growing.”
Comment: CityPlace opened in 1998 or so, I remember driving by when they built the sales centre. They will have 20-odd towers when they are done, maybe 6,000+ condos in total. And they will sell every single one. Never mind the first ones have now resold a number of times. In 2018 I bet we can look back and add up 20,000+ individual condo sales – all in that one complex. That is the Toronto condo market in microcosm.
CMHC officials said on a conference call that they are monitoring the condo markets but also don’t see a problem at the moment.
Comment: As I quoted them above, “clear evidence of a bubble is lacking”.
Royal Bank of Canada chief executive officer Gordon Nixon said there are concerns about the condo market in Vancouver, but that they aren’t indicative of the housing situation across Canada.
Comment: Exactly. Local markets are local markets. What happens in Vancouver has no effect at all on Toronto, some 4,200km away. Canada is quite a big place!
He told a financial conference in Toronto hosted by Bloomberg that he’d “like to see the rhetoric [about a housing bubble] come down a little bit.”
Comment: You and me both…
Jim Ritchie, senior vice-president of sales and marketing at toronto condo developer Tridel, said few condo buyers in Toronto are from offshore.
Of 2,100 units Tridel has delivered in the past year, about 95% were sold to local buyers, he said.
Comment: There you go. Straight from someone who knows, who does this every day. And needs to know where buyers are from, for tax reasons and down payment requirements. They collect copies of ID for all buyers, all builders do. So they are the only people who know for sure where their buyers are from. And this BS recently about foreigners screwing up our real estate market, or pushing up prices, it just shows it all to be bunk. Up to 65% of buyers are foreign investors? What a crock!
Many of those are investors, he told the same summit, and about 20% of units are put up for resale as soon as they are complete.
Comment: And of that 20%, some are investors. Others lost their job, got married or had a baby. Some were transferred, others walked in on their PDI day and realized how small it was. Or hated the view. Remember, these people all bought 3–5 years earlier – life can change a LOT in that time.
Mr. Ritchie said that across Toronto, there were 173 projects under construction over all at the end of the first quarter, representing 48,000 units. Because builders are so risk averse, they will not start a project until it is at least 70% sold, he said.
Comment: Hmm, I thought it was 143 projects, but I defer. Even so, all this talk about how many we have going on, there were 129 projects under construction at the end of 2006. And that is still more than NYC or Chicago. And the Toronto condo market has not collapsed between then and now – even with the BS of 2008 thrown into the middle of it all.
Most Tridel condos are in the $250,000-to-$500,000 range, he said, and the average age of a buyer is 33. One reason there are so many condos in the city is that the demographics of Toronto is ideal, with many singles or couples without children.
Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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